What you must know about PROPERTY TAX

Property tax can be defined as a levy on property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state, a county or geographical region, or a municipality. This is in contrast to a rent and mortgage tax, which is based on a percentage of the rent or mortgage value.

There are four broad types of property: land, improvements to land (immovable man-made objects, such as buildings), personal property (movable man-made objects), and intangible property. Real property (also called real estate or realty) means the combination of land and improvements. Under a property tax system, the government requires and/or performs an appraisal of the monetary value of each property, and tax is assessed in proportion to that value. Forms of property tax used vary among countries and jurisdictions. Real property is often taxed based on its classification.

Classification is the grouping of properties based on similar use. Properties in different classes are taxed at different rates. Examples of different classes of property are residential, commercial, industrial and vacant real property. In Israel, for example, property tax rates are double for vacant apartments versus occupied apartments.

Most taxpayers are used to the idea that they can deduct taxes paid on real property. Real property generally includes land and improvements. Most commonly, those improvements are buildings. You most likely identify the “improvement” on your land as your personal residence.

That said, state and local municipalities don’t just tax real property. They may also tax personal property.

Personal property can be tricky to define because it can be further broken down into categories. As a rule of thumb, think of personal property as property that can be easily moved, meaning that you can pick it up and take it with you. Tangible personal property is personal property that you can touch (like cars and furniture) while intangible personal property is personal property that you can’t touch (like stocks or intellectual property).

Many states or local governments impose a tax on personal property. The rules for taxation are as varied as the number of jurisdictions. For example, some states tax cars and boats owned by taxpayers while others only impose a tax on business assets.

No matter how each state imposes tax, when it comes to federal income tax, the rules are the same: you can only deduct taxes you paid on personal property that you own, when tax is imposed on the value of the item on an annual basis. If you lease, not own, the item, there’s no deduction. If tax is imposed by the piece and not by the value, there’s no deduction. If tax is imposed only at sale, there’s no deduction.

However, if you meet the criteria AND if you itemize your expenses on a Schedule A, you can deduct state and local personal property taxes paid during the year. You’ll report those expenses on line 7 of your Schedule A:

But don’t get carried away. While you might be able to deduct the cost of the taxes for owning personal property, you don’t get to deduct the costs of operating them: tax on gasoline, car inspection fees and license fees are not deductible.